Agencies should ensure that all Risk or Reward regimes specifically target the outcomes required for the project at hand, and drive them. However, the Risk or Reward regime should not be seen as a solution to all issues related to the alliance Participants' performance. Ultimately, although it is intended to give effect to the alliance concept that performance risks are collectively assumed by the alliance Participants (see section 4.4 above), the Risk or Reward model will never fully translate to an equal sharing of either positive or negative outcomes as between all Participants. In particular, it is important to recognise that the model does not relieve Owner Participants of the additional risks that are assumed under an alliance approach. However, it can still be structured to ensure that Owner Participants are comfortable that the project risks are manageable.
Ideally, the alliance Participants should model the agreed Risk or Reward regime before signing the alliance agreement, to ensure that it achieves their desired commercial outcomes. Where possible, the alliance agreement should include worked examples of the application of the Risk or Reward regime. This regime may be structured in a number of ways to address the Owner Participants' concerns, and to incentivise the alliance Participants to achieve certain cost or non-cost project objectives.
For example, the amount of the cost overrun or cost saving might be varied by assessing the Non-Owner Participants' performance(s) against agreed non-cost performance indicators. Alternatively, the Owner may establish a bonus pool to reward the Non-Owner Participants for performance against these indicators. The inclusion of non-cost performance indicators or gainshare 'modifiers' in an alliance agreement is designed to take into account the Non-Owner Participant's performance in the non-cost areas of the project that are important to the Owner Participant. For example, Risk or Reward regimes may often include a modifier for safety and environment that operates to reduce or eliminate Non-Owner Participants' entitlement(s) to any share of the bonus pool if a 'major' safety or environment event occurs (such as a fatality on site).
The Risk or Reward profile may also be used as a mechanism to address the issue of Non-Owner Participants setting a 'soft' target cost, which is often discussed as a key risk for Owners in alliance contracting. For example, the Owner Participant may offer to top up the bonus pool if the alliance achieves a certain level of underrun against the target cost. This approach is designed to ensure that the amount that will be achieved in a cost underrun scenario is captured at the outset and applied to the performance Risk or Reward regime (rather than just being distributed as cost gainshare).
Ultimately, however, it is paramount that the Owner Participant has carefully considered the setting of the target cost and the contingencies which may be built into the target cost.
Agencies should take a continual improvement approach to the evolution of the Risk or Reward mechanism, particularly at the alliance tender stage. For example, tenderers may be challenged to see whether they would be prepared to put more of their profit at risk than other tenderers. In the absence of a competitive (or at least comparative) process for alliance contracts, it is difficult for clients to determine whether the margins, the Target Outturn Cost (TOC), the 'at risk' amounts or the Risk or Reward model are set at the right point. Those projects adopting a more rigorous approach to risk assessment before alliance contract award are better placed to ensure that the painshare/gainshare limits actually drive the behaviours and project outcomes that the government is trying to achieve.
It is also important to understand that in any Risk or Reward regime, the Non-Owner Participants are not sharing in 'profits' or 'losses' of the project or the delivery requirement. Instead, the alliance Participants are sharing in the outcomes of the project. From a cost perspective, a positive outcome will be achieved where there is a saving against the target cost. However, it needs to be recognised that such savings do not represent a collective profit for the alliance Participants.
From a legal standpoint, the Risk or Reward regime should also not describe cost savings or cost overruns as 'profits' or 'losses', as this could give rise to questions about whether the relationship between the Owner Participant and Non-Owner Participant(s) is one of principal and contractor or something different, such as partners or joint venture Participants. Owner Participants need to be careful to ensure that the relationship between them and the Non-Owner Participant remains that of principal and contractor, given the legal consequences that flow from this difference in relationship.